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How Sensitive is the Public Budget Balance to Cyclical Fluctuations in the EU?


  • Virén, Matti


This paper discusses the fiscal behaviour of EU countries in 1972-1999. It attempts to find out how deficits adjust to changes in interest rates and output growth by examining the hypothesis that the reaction of deficits to output growth is non-linear: relatively small in "good times" and quite substantial in depressions. This hypothesis is tested using pooled cross-country data for 14 EU countries. All test results give support for the hypothesis, which suggests that nonlinearity is an essential ingredient of the fiscal policy transmission mechanism. The paper also discusses some explanations and policy implications of this finding. It is also found that overall deficits are quite sensitive to output fluctuations. This result appears to be quite robust in terms of different model specifications and estimation methods. The sensitiveness seems to be related to the size of the public sector.

Suggested Citation

  • Virén, Matti, 2000. "How Sensitive is the Public Budget Balance to Cyclical Fluctuations in the EU?," Discussion Papers 230, VATT Institute for Economic Research.
  • Handle: RePEc:fer:dpaper:230

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    References listed on IDEAS

    1. Peter Brandner & Leopold Diebalek & Helene Schuberth, 1998. "Structural Budget Deficits and Sustainability of Fiscal Positions in the European Union," Working Papers 26, Oesterreichische Nationalbank (Austrian Central Bank).
    2. Matti Virén, 1998. "Do the OECD Countries Follow the Same Fiscal Policy Rule?," Discussion Papers 186, Government Institute for Economic Research Finland (VATT).
    3. Olivier Jean Blanchard, 1990. "Suggestions for a New Set of Fiscal Indicators," OECD Economics Department Working Papers 79, OECD Publishing.
    4. Sutherland, Alan, 1997. "Fiscal crises and aggregate demand: can high public debt reverse the effects of fiscal policy?," Journal of Public Economics, Elsevier, vol. 65(2), pages 147-162, August.
    5. Buti, Marco & Franco, Daniele & Ongena, Hedwig, 1998. "Fiscal Discipline and Flexibility in EMU: The Implementation of the Stability and Growth Pact," Oxford Review of Economic Policy, Oxford University Press, vol. 14(3), pages 81-97, Autumn.
    6. Blinder, Alan S. & Solow, Robert M., 1973. "Does fiscal policy matter?," Journal of Public Economics, Elsevier, vol. 2(4), pages 319-337.
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    Cited by:

    1. Eliza Lis & Christiane Nickel, 2010. "The impact of extreme weather events on budget balances," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(4), pages 378-399, August.
    2. VirÉn, Matti, 2000. "Fiscal Policy, Automatic Stabilisers and Policy Coordination in EMU," Discussion Papers 744, The Research Institute of the Finnish Economy.
    3. Mika Tujula & Guido Wolswijk, 2007. "Budget balances in OECD countries: what makes them change?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 34(1), pages 1-14, March.


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